Operational Strategies for Distributing Durable Goods in the Base of the Pyramid
Novel life-improving products such as solar lanterns and energy-efficient cookstoves address essential needs of consumers in the Base of the Pyramid (BOP). However, the profitable distribution of these products is often difficult since BOP customers are risk-averse, their ability to pay (ATP) is often lower than their willingness to pay (WTP), and they face uncertainty regarding these products' value. Given this context, we examine two strategies commonly used in practice by distributors in the BOP: (1) improving the product's affordability through a discount and (2) increasing awareness of the product's value. We introduce a supply chain model for the BOP and analyze a distributor's pricing problem with refunds and a distributor's optimal budget allocation between strategies (1) and (2). We find that, in the BOP, the distributor's profit-maximizing budget allocation often yields the lowest consumer surplus. This misalignment between profits and consumer surplus disappears if customers' ATP is high. Nevertheless, we show that the distributor can mitigate this misalignment by offering free product returns. Finally, we will discuss a few empirical findings on relationship management in product distribution at the BOP.
Meeting ID: 945 3219 8518